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Company law: indoor management rule. PLEASE HELP.

If an employee is found to have no actual authority and then no ostensible authority (because they failed the test set by Lord Diplock in Freeman) can you still explore indoor management?

Reply 1

Forum User

No.

The only effect of s 40 is that a third party is unaffected by limitations in the company's constitution. If an individual director purports to do something which he has not been authorised to do by the board of directors, and has no apparent authority to enter into a particular contract, then the company will not be bound by his actions. That is clear from the words of s. 43(1)(b) Companies Act 2006 (and see, e.g, Bowstead & Reynolds at 8-039).

s. 40 would come into play, for example, if an individual director *did* have apparent authority to enter into a particular contract but the company's articles of association state that contracts of that type can only be entered into by the board of directors acting together. The third party would not be bound by that limitation and the contract would be binding.

On the other hand, s 44 Companies Act 2006 (read in conjunction with s. 43(1)(a)) does expand the usual rules on agents' authority. A document executed by two directors of a company in writing (and expressed to be executed on behalf of the company) binds the company whether or not the directors in question have apparent or actual authority, provided that the third party is acting in good faith. Such a document has the same effect as if it was executed under the common seal of the company, and by s. 43(1)(a), a company can contract by writing under its common seal.